Reaching Retirement Readiness
Aided by Auto Features, Plan Participants Are on a Positive Trajectory
Being able to replace working income with income generated from retirement savings is the essential definition of retirement readiness. The percentage of working income that an individual may need in retirement will vary, depending on several factors, such as whether they will still have a mortgage, the amount of their social security benefit, their tax bracket, variable health care costs, lifestyle choices, and income from part-time work, among others.
When projecting retirement income needs, a 70–85 percent target replacement ratio is commonly cited. Recent research by Vanguard reveals that goal may be well within reach for many plan participants. The 2022 Vanguard Participant Saving Rate Index suggests that 7 of 10 DC plan participants are currently saving at rates that would enable them to attain a 65 percent replacement rate in retirement. Furthermore, its data shows that just a modest increase in participant elective deferral rates would enable most plan participants to attain a 75 percent replacement rate.
Assumptions Used
Vanguard’s researchers analyzed approximately 1.9 million eligible employees and 1.5 million actively contributing participants in approximately 880 plans for which the firm serves as recordkeeper. Research modeling assumes that target saving rates are 9 percent where income is less than $50,000, 12 percent where income is $50,000–$100,000, and 15 percent where income is more than $100,000 (saving rates include both the employee elective contributions and any employer contributions). The study also assumes a 75 percent target replacement ratio, 4 percent real return, 1 percent real wage growth, 40 years of saving (from age 27 to 67), and a 4 percent withdrawal rate at retirement.
The Impact of Automatic Features
The researchers note that while some participants may not be saving at or above their target rate, many are close. Auto-enrollment coupled with auto-escalation will be instrumental in helping many participants get the rest of the way. Currently, 4 of 10 participants in the study are automatically enrolled and will see their saving rates rise 1–3 percentage points during the next few years. At this rate, the study’s modeling shows that 70 percent of participants would reach a 75 percent replacement rate in retirement.
Additional Observations
Across all eligible participants in plans with automatic enrollment, employees are much more likely to be saving effectively (45 percent, compared with 26 percent in plans without automatic enrollment). As of year-end 2021, 58 percent of plans have a default contribution rate of 4 percent or higher, compared with just 32 percent of plans 10 years ago. An automatic enrollment default of 6 percent or higher was a strong predictor of participants saving effectively, along with a generous employer match. Plan size did not affect the results of the study.
Web Resources for Plan Sponsors
- Internal Revenue Service, Employee Plans: www.irs.gov/ep
- U.S. Department of Labor, Employee Benefits Security Administration: www.dol.gov/ebsa
- 401(k) Help Center: www.401khelpcenter.com
- PLANSPONSOR magazine: www.plansponsor.com
- BenefitsLink: www.benefitslink.com
- Plan Sponsor Council of America: www.psca.org
- Employee Benefit Research Institute: www.ebri.org